You may have paid for car insurance for the next few years, but in those years, you never made any claims, because you feel there is no problem with your car, then how is your money managed by the insurance company, how does the insurance company make money? Do they make a lot of money from these insurance services? How much profit do you think the car insurance will get? Let's find out together, how does the car insurance company actually works and how can this company continue to run and be interested.
How do car insurance
companies have money?
There are several ways an insurance company gains, the first way is to charge premiums to the insured/customer, the second is by Float or investment income, the third way is to benefit from the policy and the last is profit when there are no claims from customers. So that you understand better, here is the explanation.
Charge Premiums to Customers/Insured
Insurance companies earn profits by withdrawing more money from customers by increasing premiums than they have to pay when insurance claims. However, due to the proliferation of the insurance business, insurance companies have become very competitive, this practice has become unwelcome. The way to increase premiums is to divide consumers into several classes or categories. Consumers who are willing to pay more premiums are given a discount. Meanwhile, consumers with lower premiums are not subject to any discount at all. Classes are also divided based on their abilities and risk factors.
Investing Insurance Premium Payment
The second way that insurance companies make a profit is by using what is known as a 'float' to make investments. Companies that promise to take over the sum insured reach billions, it is impossible to only rely on premium funds from their customers to replace claims. They also benefit by rotating the total customer premiums collected in various financial investments.
Head of Actuarial and Risk Management Division of AAJI Fauzi Arfan the insurance industry has benefited from investment management for a long time. Investment plays a big role in profit because the insurance management fund is very large. Insurance float itself is the difference between the premiums collected by the insurance company and the claims that must be paid to customers. For example, insurance companies earn a total of IDR 700 billion in a year from the premiums paid by customers on their insurance policies. For example, in one year there has been an insurance claim of Rp 350 billion. This means that the insurance company's profit is Rp 350 billion (Rp 700 billion – Rp 350 billion = Rp 350 billion). It does sound like a profit – but it's not. The difference is that the company's profit (insurance) is calculated on an annual basis, while the float is calculated monthly. An insurance company may pay fewer claims in January than in June, for example, and during the month between February and May it can use the available funds – i.e., ‘idle’ premiums – to invest in other sectors. Simply put, this practice of borrowing money from customers is very beneficial for insurance companies because they do not have to pay interest to customers.
Advantages of Policy Cancellation
The insurance company will benefit if there is an insurance account closing because the risk of your claim will be lost and the company can keep all the premiums you have paid. If the scheme is half an investment, such as Unit Link insurance, part of the profit according to the calculation will be paid to you as a customer. However, even if the scheme is half an investment when the policy cancellation is complete, the insurance company has actually posted a profit. Another thing that can cause a policy cancellation is if you don't pay the premium for a long time. If this is the case, the prepaid premium will be to the benefit of the insurance company. So, the insurance company doesn't really matter if there is an account closing, they can still benefit from the premiums you have paid.
Profit When No Claim
If your car insurance contract ends with no claim submission at all, it means that the premium you pay becomes the insurance company's profit. This is normal and indeed the purpose of insurance is to provide a sense of security from risk during the insurance contract.
Do insurance companies make a lot of money?
The average customer may only know that the insurance company makes a profit from the administrative fees that are deposited by its customers every month. But imagine how much profit you can get with this administration fee that ranges from Rp. 100 to 200 thousand per year? Of course, not much can't even cover the company's operational costs. Because they cannot rely solely on customer contributions, insurance companies are looking for other, of course, legal ways to generate profits so that the company can survive, paying the huge claims they promise to customers. You need to know, at least the insurance company must prepare almost double the total premium paid by life insurance customers. So, it needs careful calculations and strategies so that this company can grow and develop like other business practices.
With sizable premiums from customers that continue to be deposited continuously, generally, companies have about start from hundreds of millions of US dollars, various insurance companies can reap such huge profits from investing this 'float' so they can still pay claims and keep the rest. It can be concluded that insurance companies make a profit by 'selling' insurance beyond the required value and by temporarily borrowing money from their customers, namely customers aka premium payers, to then invest. However, not all insurance companies can survive in the highly competitive insurance company market. There are times when insurance companies lose money because of wrong investments. Like it or not, they have to bear huge losses from this company. As long as the insurer has sufficient liquidity and sufficient long-term asset value to cover such losses and pay customer claims, it can continue to operate like any other business practice.